Body Corporate 324525 v Butcher [2016] NZHC 887 (26 April 2016)

Last Updated: 23 May 2016

IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY

CIV-2016-488-30 [2016] NZHC 887

UNDER	the Insolvency Act 2006
IN THE MATTER OF	the bankruptcy of ANTHONY JOHN BUTCHER
BETWEEN	BODY CORPORATE 324525 Judgment Creditor
AND	ANTHONY JOHN BUTCHER Judgment Debtor

Hearing:	26 April 2016 at 3:00pm
Appearances:	B Brill for Judgment Debtor G Coutts for Judgment Creditor
Judgment:	26 April 2016

_{ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL}

Solicitors:

Barry E Brill Ltd, Paihia, for Judgment Debtor

Grove Darlow, Auckland, for Judgment Creditor

BODY CORPORATE 324525 v BUTCHER [2016] NZHC 887 [26 April 2016]

[1] On 14 March 2016 Body Corporate 342525 served a bankruptcy notice on Mr Butcher. On 16 March 2016, Mr Butcher applied to set aside the notice. This is the decision on that application.

[2] Body Corporate 342525 is the body corporate for the Bridgewater Bay Apartments at 2 Paihia Road, Paihia. Mr Butcher is one of the owners of the apartments. There is ongoing litigation between the body corporate and some of the owners of the apartments. The body corporate and the majority of the owners want to deal with what they understand to be water ingress problems in the apartments. A minority of the owners, including Mr Butcher, disagree with the course that the majority is taking. These differences have led to litigation in proceedings CIV-2014-

488-122 and CIV-2015-488-86. In those proceedings, Muir J made a costs order in favour of the body corporate and against the other owners including Mr Butcher. He made the order on 24 July 2015, when the other owners withdrew an application to re-call a judgment that Muir J had given on 30 April 2015. Apparently the minority owners had appealed against Muir J’s decision, and that appeal barred them from applying for re-call. The minority owners apparently accepted that, and withdrew their re-call application. With that, the body corporate sought costs which Muir J ordered. In his minute of 24 July 2015, he said:

[3] I do, however, award costs on a 2B basis. That is against all plaintiffs jointly and severally and payable immediately. In the event the parties are unable to settle the quantum of costs, memoranda can be filed.

[3] While this does not appear in the evidence, Mr Brill, who is acting for the minority owners in the other proceeding as well as acting for Mr Butcher in this matter, advised that during August 2015 costs were agreed between the parties. As Muir J made clear, costs were payable jointly and severally. That means that each of the plaintiffs in the proceeding in which the costs were awarded, was responsible for payment of those costs.

[4] While the amount of costs was agreed in August 2015, none of the minority owners paid the costs and the body corporate did not take any steps to enforce the

order for costs until March 2016. The body corporate’s lawyers had the order for costs sealed, and sent the sealed order for costs to Mr Brill with a demand for payment. They demanded payment within three working days, that is, by 8 March

2016.

[5] No payment was made at that stage. The body corporate applied for the issue of a bankruptcy notice on 11 March 2016. The notice was issued on that day. The bankruptcy notice follows the required form of bankruptcy notice under r 24.8 of the High Court Rules, s 29 of the Insolvency Act 2006 and Form B2 of the First Schedule of the High Court Rules. The notice identifies the debt as the order for costs obtained on 24 July 2015. It also claims interest at 5 per cent per annum and solicitor/client cost of $748.00. The total amount demanded is $7,600.82.

[6] As required by the rules, the bankruptcy notice contains this statement:

A certified copy of the judgment on which this bankruptcy notice is based is attached.

The bankruptcy notice also contains the normal information required. In particular the debtor is advised of his right to dispute the claim for costs and how he should go about disputing the claim for costs. The notice also provides:

If you do not pay the costs claimed or dispute the claim for costs, you will commit an act of bankruptcy for which you may be adjudicated bankrupt.

[7] When there is an application to set aside a bankruptcy notice, time for compliance with the notice is extended until the setting aside application is determined.¹ Mr Butcher has applied within time to set aside the bankruptcy notice. Accordingly, the time for him to comply with the notice is still running.

[8] The bankruptcy notice was served on Mr Butcher on 14 August 2015 at 8:35 am. The process-server was Mr Gray, another of the owners at the Bridgewater Bay Apartments. Mr Butcher says that the only document served on him was the bankruptcy notice. He says that the sealed order for costs was not served on him.

Mr Gray’s affidavit of service confirms that. His affidavit exhibits the document he

served: the bankruptcy notice, but not the sealed order for costs.

[9] Mr Butcher submits first that the bankruptcy notice ought not to have issued because too little time was given in which to pay the costs. Further he says that the bankruptcy notice is invalid. The ground for invalidity is the non-service of the sealed order for costs. The notice was a nullity. Now that Mr Butcher had paid the costs, there is nothing needing to be rectified.

[10] As to payment of the debt, the evidence from the body corporate’s lawyers is

that payment of the sum of $6,850.00 was received into their trust account on

14 March 2016.

[11] As to the unreasonableness of giving only three working days notice of payment. Costs had been agreed in August 2015. The lawyers for the body corporate did not press for payment until March 2016. Mr Brill calculates the lapse in time from the order of Muir J to the time of the demand as 137 working days. The point remains that the debt was payable once the costs had been fixed. That appears from r 14.8 of the High Court Rules:

Costs on an opposed interlocutory application, unless there are special reasons to the contrary, -

(a) must be fixed in accordance with these rules when the application is determined; and

(b) become payable when they are fixed.

As costs were fixed by agreement in August 2015, they became payable then.

[12] As to the complaint that the time for payment was too short. While there tends to be a common practice that letters of demand usually require payment within a week, it cannot be said that requesting three working days for payment was unreasonable. In this, I refer to the decision of the Court of Appeal in ANZ Banking Group (NZ) Ltd v Gibson,² where Richardson J discussed time for compliance with demands in the context of appointing a receiver when demand is made by a secured

creditor. In that case the period of time allowed was much shorter than three working days. In the context of this case, I do not regard the period of three working days as being unreasonable, even if it may seem tough.

[13] The position at 11 March 2016 was that the costs had not been paid to the body corporate. The order for costs had been sealed. There is no stay of execution. There is no appeal from the decision fixing the costs. At 11 March 2016, one week after demand had been made, the costs order was unmet. The body corporate was entitled to enforce the order by serving a bankruptcy notice on Mr Butcher. Mr Butcher may consider it unfair that he among his co-plaintiffs had been singled out for payment, but he was jointly and severally liable. The body corporate was entitled to proceed against any of the plaintiffs to enforce the costs order. I see nothing about the steps taken up to the issue of the notice that prevents the body corporate from applying for it.

[14] As to the failure to serve the sealed order for costs with the bankruptcy notice. It is certainly a requirement of r 24.8 and form B2 of the First Schedule of the High Court Rules that a certified copy of the judgment should be attached to the bankruptcy notice. To that extent the bankruptcy notice did not comply with the form in the Rules, with r 24.8 and correspondingly with s 29 of the Insolvency Act

2006. The question is whether that failure invalidates the bankruptcy notice. A similar question came before Associate Judge Abbott in Re Stockco Ltd, ex parte Denize.³ In that case a bankruptcy notice had been served without attaching the sealed order for judgment which was the foundation for the debt in the bankruptcy notice. Associate Judge Abbott held that in the absence of any evidence as to the prejudice to the judgment debtors by the omission, s 418 of the Insolvency Act applied. He held that the creditor may rely on bankruptcy notices notwithstanding the omission.⁴

_{[15] Section 418 of the Insolvency Act says:}

³ Re Stockco Ltd, ex parte Denize HC Auckland CIV-2011-404-3557, 31 October 2011.

418 Defects in proceedings

(1) A proceeding under this Act must not be invalidated or set aside for a defect (which includes misdescription, misnomer, or omission) in a step that must be taken as part of, or in connection with, the proceeding, unless a person is prejudiced by the defects.

(2) The Court may order the defect to be corrected, and may order the proceeding to continue, on conditions that the Court thinks appropriate in the interest of everyone who has an interest in the proceeding.

[16] Associate Judge Abbott rejected a submission that s 418 did not apply to a

bankruptcy notice. He followed the Court of Appeal’s decision in Best v Watson.⁵

That was a decision under s 11 of the Insolvency Act 1967. Section 11 corresponds to s 418 of the Insolvency Act 2006. After referring to cases from other areas of the law which require proceedings but also allow for the rectification of irregularities, the court said:

We think that the same considerations apply under s 11. That provision may be invoked in any case where the proceedings are defective and however the defect may be characterised. It will always be a question of degree whether or not it can be said that notwithstanding failure to comply with an apparently mandatory requirement of the Act or of the Rules, there is before the Court what can fairly be described as proceedings under the Act; and that question should not be approached in a mechanical or technical way.

[17] Associate Judge Abbott also referred to Bridgecorp Ltd v Nielsen⁶ where the court declined to find that an omission to disclose the existence of a security rendered an application for adjudication a nullity.

[18] I do not consider that there has been any prejudice to Mr Butcher in the circumstances of this case. That becomes apparent from the affidavit of Mr Gray. He deposes that shortly after he served the bankruptcy notice on Mr Butcher, he noticed Mr Brill, the lawyer for Mr Butcher (who also happens to live in the same apartments) leave his apartment and go upstairs to level 3. Mr Gray deposes that Mr Butcher is the only person currently occupying an apartment on a particular section of level 3 other than himself. Given that Mr Brill is acting for Mr Butcher in the substantive proceedings, Mr Brill was in a position to advise Mr Butcher as to

_{the effect of the bankruptcy notice and also as to the original order for costs. In}

⁵ Best v Watson [1979] 2 NZLR 492 (CA) at 494.

those circumstances, I cannot see how Mr Butcher has been prejudiced in not having received the original order for costs with the bankruptcy notice. Mr Brill had certainly received them, certainly in the week before, and Mr Brill was in a position to advise Mr Butcher of the order. In his written submission, Mr Brill set out facts which he said made the Stockco case distinguishable. There may be differences in particular respects between the Stockco case and this one. But at the end of the day the test is whether Mr Butcher has been prejudiced by the failure to serve the order for costs on him. In the circumstances of this case, I am satisfied that he has not been.

[19] Mr Brill submitted that even if the matter did not go to the nullity of the bankruptcy notice, any orders which the court might make under s 418(2) could operate only prospectively. That is not the way that s 418 is used in practice in relation to bankruptcy notices. Such questions typically arise in applications to set aside bankruptcy notices. If the court considers that the notice is not a complete nullity, that there is some proceeding, and that the irregularity has not prejudiced the debtor, the court upholds the notice which continues to apply as if it had been regularly issued at the outset. In ruling that the body corporate is entitled to rely on the notice, I am in effect ruling that the absence of the sealed order for costs is not to exempt Mr Butcher from complying with it from the time that he was served with it. That ruling operates with effect from date of service, not from the date of this decision.

[20] Contrary to the written submissions filed for the body corporate, I observe that if Mr Butcher had paid the order for costs before the body corporate applied for the bankruptcy notice, the court would set the bankruptcy notice aside. The court would do so in its inherent jurisdiction to prevent an abuse of process. There is potential for injustice to a debtor who has already paid a debt before a bankruptcy notice is issued. Once served with the notice, the debtor will not comply with the notice because he has already paid, yet the non-compliance with the notice might be opportunistically relied upon to found an argument that he has committed an act of bankruptcy. For example the creditor might file a bankruptcy application relying on further indebtedness. Or another creditor might rely on the alleged act of bankruptcy. To protect himself against that injustice, the debtor is entitled to ask the

court to set aside the notice so that non-compliance with it cannot be relied upon to found an act of bankruptcy. I regard that as coming within the inherent jurisdiction of the court and within the spirit of the decision of Master Kennedy-Grant in Re Wise.⁷

[21] In this case however, I am satisfied that the costs were not paid before the bankruptcy notice was issued. The body corporate’s lawyers have shown that the amount of the costs order was received in their trust account on 14 March 2016. The circumstances of Mr Butcher consulting with Mr Brill after service are matters that point towards payment having been arranged after service rather than before. On the evidence, the more likely explanation is that Mr Butcher arranged payment after service, not before.

[22] So far, Mr Butcher has partly complied with the bankruptcy notice. He has paid the sum of $6,850.00 which is part of the amount demanded. The bankruptcy notice also sought payment of costs. Mr Butcher has challenged the costs claimed. The bankruptcy notice makes it clear that a debtor who wishes to challenge the costs sought in the bankruptcy notice can come to court to have the amount of costs fixed. Clearly, while the amount of costs is in dispute, the time for complying with the notice must be suspended. That arises under r 24.10 of the High Court Rules but it seems to be a matter that would follow inevitably anyway. A debtor cannot be held to be in default in paying costs if costs remain at large and have still to be fixed.

[23] In my judgment, the costs claimed by the body corporate in the bankruptcy notice are excessive. The body corporate has claimed $748.00 which is said to include a fee for filing the notice, and a fee for serving the notice. There seems to have been a proper disbursement claimed for $200 for filing the notice. The fee for serving the notice seems to be excessive given that the body corporate did not engage a process-server to do so. Instead it arranged for one of the other owners in the apartments to do so privately. The body corporate may have incurred courier costs in sending the notice to Mr Gray for service and that disbursement may be

_{recoverable, but it cannot have been $150.00.}

⁷ Re Wise HC Auckland B227/95 and B228/95, 21 June 1995.

[24] The legal costs on issuing the bankruptcy notice are fixed under Part 14 of the High Court Rules. Under Schedule 3, step 44 deals with the filing and service of a bankruptcy notice. The question is whether that should be band A or band B. Mr Brill submits for band A on the basis that this is for a relatively small sum of money and is a very straightforward step. I agree, and I fix the band as band A. Accordingly, .1 of a day applies for band A. I fix the costs at $2,230 per day under Schedule 2 as the sum of $223.00.

[25] In summary, the costs for complying with the bankruptcy notice will be fixed at $223.00 plus a filing fee of $200.00, plus the courier fee of sending the bankruptcy notice to Mr Gray. I have not been provided with that courier fee. Accordingly, costs cannot be fixed in this hearing. It will accordingly be necessary to adjourn this matter until 23 May 2016 to allow that final element to be fixed.

[26] The consequence of that is that the time for complying with the notice is still running. Obviously if Mr Butcher pays the outstanding costs then he will not commit an act of bankruptcy. He will comply with the notice and there will be no further consequences.

[27] Accordingly, I record that Mr Butcher has partly complied with the notice by a payment of $6,850.00. There cannot be further compliance until costs and disbursements are fixed, but that cannot be done until 23 May 2016.

Costs

[28] I have heard submissions as to costs on this matter. Mr Brill produced a letter he had sent to the body corporate’s lawyers on a “without prejudice save as to costs” basis. Mr Brill’s offer to settle the matter was that the bankruptcy notice should be set aside, costs to lie where they fall, and Mr Butcher would pay the body corporate’s lawyers half the solicitor/client costs, namely $376.00.

[29] The body corporate has tendered a schedule showing costs on a category 2B basis of $6,244.00 plus disbursements of $153.36, totalling $6,397.36. Before assessing the offer by Mr Brill, I have to establish what the position would have been

but for the offer made by Mr Brill. If the body corporate would have been better off under Mr Brill’s offer than what I would have ordered, then Mr Butcher will be entitled to costs.

[30] On the application to set aside, the parties have had mixed success. Mr Butcher attacked the issue of the notice and also attacked the validity of the notice. On those arguments he failed, but he won on his argument that the costs claimed in the notice were excessive. Correspondingly, the body corporate has had the reverse position – it has won on its entitlement to issue the bankruptcy notice, and it has won on the validity of the notice, but has lost on costs.

[31] Given that divided success, and barring Mr Brill's letter, I would have ordered costs to lie where they fall. That means that the offer that Mr Brill made is better than the result I would have ordered by $376.00. By reason of that offer $376.00, Mr Butcher is entitled to have costs on the hearing today.

[32] As to the timing of Mr Brill’s letter. This case has been brought on at fairly short notice. The body corporate did not file its notice of opposition to the setting aside application until 21 April 2016 (that was last Thursday) even though it had been served quite some time before. It was out of time, not that any point was made about that. When the matter was referred to me on Friday, 22 April 2016, I directed that I would hear argument on the matter today, which would ordinarily be the date for the first call. Mr Brill cannot be criticised for not making his offer earlier than he did – on 25 April. He gave until noon, 26 April 2016 for the body corporate to accept it. I do not consider that there can be any criticism for the offer having been made only after the notice of opposition was received and notice was given for the hearing today. In other words, the lateness of the offer cannot be challenged.

[33] On that basis, Mr Butcher is entitled to costs on the hearing. Those are the only costs that were incurred after the offer was made. I fix those costs for .5 of a day under category 2B at $1,115.00. I therefore order costs to Mr Butcher of

$1,115.00.

.......................................

Associate Judge R M Bell